Capital in the Twenty-First Century

by Thomas Piketty

  6. As a reminder, the top centile in France in 2010 consists of 500,000 adults out of an adult population of 50 million.

  7. As is also the case for the nine-tenths of the population below the ninetieth percentile, but here compensation in the form of wages (or replacement pay in the form of retirement income or unemployment insurance) is lower.

  8. The pay scales for civil servants are among the pay hierarchies about which we have the most long-term data. In France in particular, we have detailed information from state budgets and legislative reports going back to the beginning of the nineteenth century. Private sector pay has to be divined from tax records, hence is little is known about the period prior to the creation of the income tax in 1914–1917. The data we have about civil service pay suggest that the wage hierarchy in the nineteenth century was roughly similar to what we see in the period 1910–2010 for both the top decile and the bottom half, although the top centile may have been slightly higher (without reliable private sector data we cannot be more precise). See the online technical appendix.

  9. In 2000–2010, the share of wages in the P99–99.5 and P99.5–99.9 fractiles (which constitute nine-tenths of the top centile) was 50–60 percent, compared with 20–30 percent for mixed incomes (see Figure 8.4). High salaried incomes dominated high mixed incomes to almost the same degree as in the interwar years (see Figure 8.3).

  10. As in Chapter 7, the euro figures cited here are deliberately rounded off and approximate, so they are no more than indications of orders of magnitude. The exact thresholds of each centile and thousandth are available in the online technical appendix, year by year.

  11. Note, however, that the data on which these boundaries are based are imperfect. As noted in Chapter 6, some entrepreneurial income may be disguised as dividends and therefore classed as income from capital. For a detailed, year-by-year analysis of the composition of the top centiles and thousandths of income in France since 1914, see Piketty, Les hauts revenus en France, 93–168.

  12. Income from capital seems to represent less than 10 percent of the income of “the 9 percent” in Figure 8.4, but that is solely a result of the fact that these figures, like the series on the shares of the top decile and centile, are based exclusively on self-declared income statements, which since 1960 have excluded so-called fictive rents (that is, the rental value of owner-occupied housing, which was previously part of taxable income). If we included nontaxable capital income (such as fictive rents), the share of income from capital among “the 9 percent” would reach and even slightly exceed 20 percent in 2000–2010. See the online technical appendix.

  13. See the online technical appendix.

  14. In particular, I always include all rents, interest, and dividends in income declarations, even when some of these types of income are not subject to the same tax schedule and may be covered by specific exemptions or reduced rates.

  15. See the online technical appendix.

  16. Note that throughout World War II, the French tax authorities carried on with their work of collecting income statements, recording them, and compiling statistics based on them as if nothing had changed. Indeed, it was a golden age of mechanical data processing: new technologies allowed for automated sorting of punched cards, which made it possible to do rapid cross-tabulations, a great advance over previous manual methods. Hence the statistical publications of the Ministry of Finance during the war years were richer than ever before.

  17. The share of the upper decile decreased from 47 to 29 percent of national income, and that of the upper centile from 21 to 7 percent. Details are available in the online technical appendix.

  18. For a detailed analysis of all these evolutions, year by year, see Les hauts revenus en France, esp. chaps. 2 and 3, pp. 93–229.

  19. In World War II, the compression of the wage hierarchy actually began before the war, in 1936, with the Matignon Accords.

  20. See Les hauts revenus en France, 201–2. The very sharp break in wage inequality that occurred in 1968 was recognized at the time. See in particular the meticulous work of Christian Baudelot and A. Lebeaupin, Les salaires de 1950 à 1975 (Paris: INSEE, 1979).

  21. See Figure 6.6.

  22. See esp. the work of Camille Landais, “Les hauts revenus en France (1998–2006): Une explosion des inégalités?” (Paris: Paris School of Economics, 2007), and Olivier Godechot, “Is Finance Responsible for the Rise in Wage Inequality in France?” Socio-Economic Review 10, no. 3 (2012): 447–70.

  23. For the years 1910–1912 I completed the series by using various available data sources, and in particular various estimates carried out by the US government in anticipation of the creation of a federal income tax (just as I did in the case of France). See the online technical appendix.

  24. For the years 1913–1926, I used data on income level and categories of income to estimate the evolution of wage inequality. See the online technical appendix.

  25. Two recent books about the rise of inequality in the United States by well-known economists demonstrate the strength of the attachment to this relatively egalitarian period of US history: Paul Krugman, The Conscience of a Liberal (New York: Norton, 2007), and Joseph Stiglitz, The Price of Inequality (New York: Norton, 2012).

  26. The available data, though imperfect, suggest that the correction for understatement of capital income might add two to three points of national income. The uncorrected share of the upper decile was 49.7 percent in 1007 and 47.9 percent in 2010 (with a clear upward trend). See the online technical appendix.

  27. The series “with capital gains” naturally include capital gains in both the numerator (for the top income deciles and centiles) and the denominator (for total national income); the series “without capital gains” exclude them in both cases. See the online technical appendix.

  28. The only suspicious jump takes place around the time of the major Reagan tax reform of 1986, when a number of important firms changed their legal form in order to have their profits taxed as personal rather than corporate income. This transfer between fiscal bases had purely short-term effects (income that should have been realized a little later as capital gains was realized somewhat earlier) and played a secondary role in shaping the long-term trend. See the online technical appendix.

  29. The annual pretax incomes mentioned here correspond to household incomes (married income or single individual). Income inequality at the individual level increased by approximately the same proportion as inequality in terms of household income. See the online technical appendix.

  30. This visceral appreciation of the economy is sometimes particularly noticeable among economists teaching in US universities but born in foreign countries (generally poorer than the United States), an appreciation that is again quite comprehensible.

  31. All detailed series are available in the online technical appendix.

  32. This argument is more and more widely accepted. It is defended, for example, by Michael Kumhof and Romain Rancière, “Inequality, Leverage, and Crises,” International Monetary Fund Working Paper (November 2010). See also Raghuram G. Rajan, Fault Lines (Princeton, NJ: Princeton University Press, 2010), which nevertheless underestimates the importance of the growing share of US national income claimed by the top of the income hierarchy.

  33. See Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, “Top Incomes in the Long Run of History,” Journal of Economic Literature 49, no. 1(2011): Table 1, p. 9.

  34. Remember that these figures all concern the distribution of primary income (before taxes and transfers). I examine the effects of taxes and transfers in Part Four. To put it in a nutshell, the progressivity of the tax system was significantly reduced in this period, which makes the numbers worse, while increases in some transfers to the poorest individuals slightly alleviate them.

  35. See Chapter 5, where the Japanese and Spanish bubbles are discussed.

  36. See Thomas Piketty and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economic
s 118, no. 1 (February 2003): 29–30. See also Claudia Goldin and R. Margo, “The Great Compression: The Wage Structure in the United States at Mid-Century,” Quarterly Journal of Economics 107, no. 1 (February 1992): 1–34.

  37. Nor was it compensated by greater intergenerational mobility; quite the contrary. I come back to this point in Chapter 13.

  38. See Wojciech Kopczuk, Emmanuel Saez, and Jae Song, “Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937,” Quarterly Journal of Economics 125, no. 1 (2010): 91–128.

  39. See Edward N. Wolff and Ajit Zacharias, “Household Wealth and the Measurement of Economic Well-Being in the U.S.,” Journal of Economic Inequality 7, no. 2 (June 2009): 83–115. Wolff and Zacharias correctly remark that my initial article with Emmanuel Saez in 2003 overstated the degree to which the evolutions we observed could be explained by the substitution of “working rich” for “coupon-clipping rentiers,” when in fact what one finds is rather a “cohabitation” of the two.

  40. See Supplemental Figures S8.1 and S8.2, available online.

  41. See Steven N. Kaplan and Joshua Rauh, “Wall Street and Main Street: What Contributes to the Rise of the Highest Incomes?” Review of Financial Studies 23, no. 3 (March 2009): 1004–1050.

  42. See Jon Bakija, Adam Cole, and Bradley T. Heim, “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data,” Department of Economics Working Papers 2010–24, Department of Economics, Williams College, Table 1. Other important professional groups include doctors and lawyers (about 10 percent of the total) and real estate promoters (around 5 percent). These data should be used with caution, however: we do not know the origin of the fortunes involved (whether inherited or not), but income from capital accounts for more than half of all income at the level of the top thousandth if capital gains are included (see Figure 8.10) and about a quarter if they are excluded (see Supplemental Figure S8.2, available online).

  43. “Superentrepreneurs” of the Bill Gates type are so few in number that they are not relevant for the analysis of income and are best studied in the context of an analysis of fortunes and in particular the evolution of different classes of fortune. See Chapter 12.

  44. Concretely, if a manager is granted options that allow him to buy for $100 stock in the company valued at $200 when he exercises the option, then the difference between the two prices—in this case $100—is treated as a component of the manager’s wage in the year in which the option is exercised. If he later sells the shares of stock for an even higher price, say $250, then the difference, $50, is recorded as a capital gain.

  9. Inequality of Labor Income

  1. Claudia Dale Goldin and Lawrence F. Katz, The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials, 1890–2005 (Cambridge, MA: Belknap Press, 2010).

  2. See Table 7.2.

  3. In the language of national accounting, expenditures on health and education are counted as consumption (a source of intrinsic well-being) and not investment. This is yet another reason why the expression “human capital” is problematic.

  4. There were of course multiple subepisodes within each phase: for instance, the minimum wage increased by about 10 percent between 1998 and 2002 in order to compensate for the reduction of the legal work week from 39 hours to 35 hours while preserving the same monthly wage.

  5. As in the case of the federal income tax, the minimum wage legislation resulted in a fierce battle between the executive branch and the Supreme Court, which overturned the first minimum wage law in 1935, but Roosevelt reintroduced it in 1938 and ultimately prevailed.

  6. In Figure 9.1, I have converted nominal minimum wages into 2013 euros and dollars. See Supplemental Figures S9.1–2, available online, for the nominal minimum wages.

  7. Some states have a higher minimum wage than the federal minimum in 2013: in California and Massachusetts, the minimum is $8 an hour; in Washington state it is $9.19.

  8. At an exchange rate of 1.30 euros per pound. In practice, the gap between the British and French minimum wages is larger because of the difference in employer social security payments (which are added to the gross wage). I come back to this point in Part Four.

  9. Important differences persist between countries: in Britain, for example, many prices and incomes (including rents, allowances, and some wages) are set by the week and not the month. On these questions, see Robert Castel, Les Métamorphoses de la question sociale: Une chronique du salariat (Paris: Fayard, 1995).

  10. See in particular David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). Card and Krueger exploited numerous cases in which neighboring states had different minimum wages. The pure “monopsony” case is one in which a single employer can purchase labor in a given geographical area. (In pure monopoly, there is a single seller rather than a single buyer.) The employer then sets the wage as low as possible, and an increase in the minimum wage does not reduce the level of employment, because the employer’s profit margin is so large as to make it possible to continue to hire all who seek employment. Employment may even increase, because more people will seek work, perhaps because at the higher wage they prefer work to illegal activities, which is a good thing, or because they prefer work to school, which may not be such a good thing. This is precisely what Card and Krueger observed.

  11. See in particular Figures 8.6–8.

  12. This fact is crucial but often neglected in US academic debate. In addition to the work of Goldin and Katz, Race between Education and Technology, see also the recent work of Rebecca Blank, Changing Inequality (Berkeley: University of California Press, 2011), which is almost entirely focused on the evolution of the wage difference associated with a college diploma (and on the evolution of family structures). Raghuram Rajan, Fault Lines (Princeton: Princeton University Press, 2010), also seems convinced that the evolution of inequality related to college is more significant than the explosion of the 1 percent (which is incorrect). The reason for this is probably that the data normally used by labor and education economists do not give the full measure of the overperformance of the top centile (one needs tax data to see what is happening). The survey data have the advantage of including more sociodemographic data (including data on education) than tax records do. But they are based on relatively small samples and also raise many problems having to do with respondents’ self-characterization. Ideally, both types of sources should be used together. On these methodological issues, see the online technical appendix.

  13. Note that the curves in Figure 9.2 and subsequent figures do not take account of capital gains (which are not consistently measured across countries). Since capital gains are particularly large in the United States (making the top centile’s share of national income more than 20 percent in the 2000s if we count capital gains), the gap is in fact wider than indicated in Figure 9.2. See, for example, Supplemental Figure S9.3, available online.

  14. New Zealand followed almost the same trajectory as Australia. See Supplemental Figure S9.4, available online. In order to keep the figures simple, I have presented only some of the countries and series available. Interested readers should consult the online technical appendix or the WTID for the complete series.

  15. Indeed, if we include capital gains, which were strong in Sweden in the period 1990–2010, the top centile’s share reached 9 percent. See the online technical appendix.

  16. All the other European countries in the WTID, namely, the Netherlands, Switzerland, Norway, Finland, and Portugal, evolved in ways similar to those observed in other continental European countries. Note that we have fairly complete data for southern Europe. The series for Spain goes back to 1933, when an income tax was created, but there are several breaks. In Italy, the income tax was created in 1923, but complete data are not available until 1974. See the online technical appendix.

  17. The share of the top tho
usandth exceeded 8 percent in the United States in 2000–2010 if we omit capital gains and 12 percent if we include them. See the online technical appendix.

  18. The “0.1 percent” in France and Japan therefore increased from 15 to 25 times the national average income (that is, from 450,000 to 750,000 euros a year if the average is 30,000), while the top “0.1 percent” in the United States rose from 20 to 100 times the national average (that is, from $600,000 a year to $3 million). These orders of magnitude are approximate, but they give us a better sense of the phenomenon and relate shares to the salaries often quoted in the media.

  19. The income of “the 1 percent” is distinctly lower: a share of 10 percent of national income for the 1 percent means by definition that their average income is 10 times higher than the national average (a share of 20 percent would indicate an average 20 times higher than the national average, and so on). The Pareto coefficient, about which I will say more in Chapter 10, enables us to relate the shares of the top decile, top centile, and top thousandth: in relatively egalitarian countries (such as Sweden in the 1970s), the top 0.1 percent earned barely twice as much as the top 1 percent, so that the top thousandth’s share of national income was barely one-fifth of the top centile’s. In highly inegalitarian countries (such as the United States in the 2000s), the top thousandth earns 4 to 5 times what the top centile earns, and the top thousandth’s share is 40 to 50 percent of the top centile’s share.

  20. Depending on whether capital gains are included or not. See the online technical appendix for the complete series.

  21. See, in particular, Table 5.1.

  22. For Sweden and Denmark, in some years in the period 1900–1910, we find top centile shares of 25 percent of national income, higher than the levels seen in Britain, France, and Germany at that time (where the maximum was closer to 22 or 23 percent). Given the limitations of the available sources, it is not certain that these differences are truly significant, however. See the online technical appendix.